August 26, 2011 5:55 pm
Thousands of British homeowners who were advised to out take foreign currency mortgages have been hit by the strong appreciation of the Swiss franc – and now owe far more on their loans than they did a few years ago.
Swiss franc loans were sold to homeowners before the global downturn as a way to take advantage of low interest rates in Switzerland which, at the time, made repayments substantially cheaper than those on UK mortgages.
But with the Swiss franc driven to record highs as investors have sought a haven from the eurozone and US debt crises, borrowers have seen their mortgage payments soar and the value of their debts increase dramatically.
Swiss franc loans were sold by well known British banks to UK expats overseas, and thousands of Britons who bought property in Cyprus between 2006 and 2009 were sold these loans by Cypriot banks.
Some borrowers have seen their mortgages double in value, and others now owe more on their loan than their property is worth.
According to Moneycorp, if a borrower converted a sterling (GBP) mortgage worth £500,000 in August 2007 to Swiss francs (CHF), the exchange rate was 2.4022 GBP/CHF, meaning the cost in Swiss francs would be CHF 1,201,100. This week, the loan would have increased to £917,991 (not including repayments) due to the Swiss franc rising to 1.3084 GBP/CHF.
Brokers said foreign currency loans are high risk and should never have been sold to the average homeowner. They are typically only suitable for sophisticated investors who understand the foreign exchange market.
“The only reason to take out a foreign currency loan would be that you want to speculate on the foreign currency depreciating against sterling – which would see the value of your debt decrease,” explained Ray Boulger of broker John Charcol. “It should not be recommended as a product because it will save 2 or 3 per cent in interest rate costs. That could prove a very expensive mistake.”
However, lower interest rates were often cited by bank salespeople as the sole reason for borrowers to take out these loans. In 2006, Swiss mortgage rates were around 2 per cent while UK mortgage rates were almost 6 per cent.
Stuart Law of Assetz, the property investment firm, said he had considered taking out a Swiss currency loan himself due to the tempting low rates.
“I was looking at a purchase using a Swiss franc loan which had some very attractive interest rates – but of course you’ve got this capital risk lurking behind, which is potentially far more expensive,” he said.
Law pointed out that, before the downturn, the GBP/CHF exchange rate had been stable for a long time. “There were never any massive swings and I remember thinking that this is a very stable position as long as the world remains stable as a whole.”
Many of the affected borrowers claim that they were not warned of the risks of borrowing in Swiss francs – such as the risk of currency appreciation in times of economic uncertainty.
Chris Christofi of Healys, a London-based law firm, is representing borrowers who believe they were mis-sold the product. “I’ve already had about 250 enquiries from borrowers and the number is growing. I would put it in their thousands the number of people affected by this,” he said.
While he is focusing on borrowers who were recommended to take out a Swiss franc mortgage on their Cypriot property, he says he has also had a growing number of calls from borrowers who have taken out these type of loans in the UK.
“It’s a huge problem for a lot of people,” said Christofi. “Most of these people are on the verge of retirement and should never have been sold these products. This is a sophisticated level of investment.”
Christofi said he is currently putting cases together against Cypriot banks that hold these mortgages, with one bank featuring heavily in a lot of the complaints: Alpha Bank.
“In an ideal world, I’d like the mortgages to be declared void but the realistic alternative is that the bank renegotiates and ideally puts people back in the position they would have been had they taken out a loan in their own local currency, or the currency in Cyprus,” explained Christofi.
Mortgage brokers said it is important to understand the risks of taking out a foreign currency mortgage for a property located in a different country.
“The real risk is the mismatch between asset and the liability and you’ve always got that with a foreign currency loan,” warned Boulger. “If you want to minimise risk then take the mortgage out in the currency where the property is.”
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Sarah Bott, an advertising director, and her husband Matthew, a sales director, from London, went to work in Hong Kong in 2004. They had two properties in the UK – their home and an investment property – which they decided to rent out to cover the mortgage while they were abroad.
They were subsequently contacted by an adviser from RBS’s Hong Kong office following a referral from a British expat in Mrs Bott’s office. This adviser recommended taking out a Swiss Franc currency mortgage to help reduce the monthly payments on their UK properties, as the interest rates in Switzerland were low.
However, the rapid appreciation of the Swiss franc from 2007 onwards led to RBS forcing the couple to switch their loans back to sterling – as the loan then exceeded the maximum loan-to-value of 75 per cent.
As a result, the couple’s debt increased by £150,000 across the two properties.
“I have spent the last four years with constant anxiety, worry and sleepless nights,” said Mrs Bott. “We were never told by the adviser the true risk of taking out this type of mortgage. We weren’t financially savvy people playing the money markets. RBS shouldn’t be selling these foreign currency loans to people like us.”
The couple’s quarterly repayments for their home have now rocketed from £3,000 to £5,000. They have been forced to borrow money from their parents and top up the repayment with US dollars as they now live in San Francisco.
“Nobody would take out a mortgage that is this risky. We’re intelligent people but she [the adviser] sold it to us on the basis that it is safe. We trusted RBS.”
A RBS spokeswoman said: “The mortgage agreement clearly states the currency fluctuation risks involved in the facility. A mortgage is a long term product and subject to risks such as these. No one could have predicted the global economic crisis and its extend at the time of the mortgage issuance.”
“We are very mindful of customers who may potentially require assistance during the current economic climate and are committed to working with our customers on alternative arrangements where possible, as we have already been doing with the customer concerned.”
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